Question: I'm trying to advise an HOA client on what a good reserve balance should be for an HOA. What is the best formula to use?
Answer: The answer to that question is "There is no such formula". To arrive at the answer requires performing a reserve study that identifies the HOA's common element components that have a 1 to 30 year useful life. Each component is then measured, assessed for current condition, a useful life assigned to it and a current cost of repair or replacement given to it.
This information is then projected over a 30 year time frame along with the current inflation rate and rate of return on invested funds. The result is the amount of money that must be contributed each year by the owners to ensure that adequate funds are there when the various events come due. For example, if a roof has a 20 year life and a current replacement cost of $100,000, $5,000 should be reserved each year. The same process is used for all components. If reserves are funded each year following this example, they are 100% funded.
Since inflation, return on investment and cost of repairs and replacement are a moving target, this reserve study needs to be updated every year and a site inspection of the components is recommended at least every three years to keep the projections accurate.
The goal should be 100% funding which is fairest to all members. If reserves are less than 100% funded, the annual contribution needs to be increased to bring it back in line. That is why the annual update is so critical to keeping the study accurate.
Question: Our condominium building was built in the 1950s. The windows are single pane and extremely energy inefficient. The HOA has a central boiler heating system and provides heat to all units. An engineer was hired by the board to look at the window performance and he concluded that the HOA could save a great deal on money on heating if the older windows were replaced with energy efficient windows.
The governing documents indicate that the individual unit owners are responsible for unit windows. A motion was proposed at the annual meeting that all windows be replaced as recommended with costs to be assessed to each owner according to the usual HOA fee formula.
Those that voted against the motion said the vote carried no authority since the governing documents said unit windows were a unit owner's responsibility. Is this correct?
Answer: There are several issues to consider when the homeowner association involves itself in a repair or replacement of windows that is a unit owner's responsibility:
1. Where the HOA pays for heating and old windows waste heat and increase energy cost for all owners, there is a compelling reason to reduce an unnecessary expense. Moreover, the energy savings of installing new windows often produces a quick payback of 5-10 years. The payback period could be even shorter if your state offers rebates or tax credits that the individual owners can take advantage of. If those rebates or credits do exist, make sure that the contractor structures the project properly so that the unit owners can receive the benefits since the HOA itself cannot qualify.
2. As long as the vote was done properly (all unit owners received advance notice of the proposed motion) and the required number of votes was received as described in the governing documents, the HOA indeed has the authority to organize and oversee a full window replacement project on behalf of the unit owners.
3. Replacing all the windows as one project could save up to half the cost of what individual unit owners would pay.
4. With proper project specifications and oversight, the HOA can better ensure that a licensed, bonded and ensured contractor is used, that the installation is done according to manufacturer's specification and that a manufacturer's and contractor's warranty are received.
5. Since windows are a unit owner's responsibility, replacement costs should be assessed according to each unit's actual window cost and not according to an HOA fee formula which is usually equal. If all units have exactly the same number or square footage of window, distributing cost equally is okay. Otherwise, costs assessed to each owner should be based on the window benefit received.
This is a wonderful example of win-win-win-win. The HOA can reduce project costs, energy costs will be significantly reduced, all owners will benefit in the future and prospective buyers will perceive greater value in their purchase.
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